2015 Economic & Financial Market Outlook

Transcription

1 2015 Economic & Financial Market Outlook Scott D. Knapp, CFA Managing Principal Investment Consulting MCA CUNA Mutual Group Proprietary Reproduction, Adaptation or Distribution Prohibited 2014 CUNA Mutual Group, All Rights Reserved.

2 Disclaimer The only function of economic forecasting is to make astrology look respectable. John Kenneth Galbraith 2

3 Current Conditions 3

4 Markets Up! Asset Class % Returns as of May 31, 2015 Asset Class Index 3 Mos. YTD 1 Year 3 Year 5 Year U.S. Large-Cap Stock Russell U.S. Mid-Cap Stock Russell Midcap U.S. Small-Cap Stock Russell International Stock MSCI EAFE USD Emerging Market Stock MSCI EM USD Investment Grade Bond Barclays Aggregate High Yield Bond Barclays High Yield Source: Bloomberg 4

5 Stock Valuations Also up! Standard Lagging PE Shiller CAPE PE Source: Mutpl.com Source: Mutpl.com Standard Lagging Average: Shiller CAPE Average:

6 Near-Term Outlook Still Positive Remember this during the remainder of the presentation. 6

7 Mostly Transitory Factors Hurt 1Q 2015 Growth Bad weather? West Coast port strike? Something more? 7

8 Employment Growth Solid in 1Q 2015 Energy sector weighing down new job creation. 8

9 Trending Toward Full Employment U-3 Headline Unemployment U-6 Real Unemployment Source: U.S. Bureau of Labor Statistics Real improvement, not a calculation trick. 9

10 Declaring (Currency) War Source: JP Morgan Asset Management Global competitors playing hardball. 10

11 Oil Prices Collapse Why the collapse? Falloff in demand? Glut in supply? 11

12 Oil Imports Fall Source U.S. Energy Information Administration Reliance on external sources falls. 12

13 Near-Term Summary Economy continues to experience a sluggish recovery that still looks sustainable. Employment growth continues, but real wages are still stagnant. Inflation is nowhere to be seen. The U.S. Federal Reserve is likely to increase short-term rates in 3Q. Financial markets have performed well, but stock valuations are stretched and susceptible to meaningful corrections. International economies are mixed: China has slowed and the EU has accelerated. Currency manipulation is rampant and currently hurting the U.S. economy. Oil prices have stabilized, but structural change has permanently altered the market. 13

14 Long-Term Challenge: What will cause the economy to grow? 14

15 Wall Street vs. Main Street? When culture and politics reflect current conditions. 15

16 Quantitative Easing Assets Liabilities Extraordinary times, extraordinary measures. 16

17 Easy Money But Little Real Benefit Printed money did not circulate in the real economy. 17

18 Land, Labor, or Capital: Who Wins? Source: US Bureau or Labor Statistics, US Commerce Department Family incomes not keeping up with GDP growth... 18

19 Land, Labor, or Capital: Who Wins? and the difference won t narrow until productivity increases. 19

20 Land, Labor, or Capital: Who Wins? Falling interest rates lead to increases in financial asset prices. 20

21 Capital Wins! 21

22 Wall Street vs. Main Street - Summary Capital Wins! Conditions have led to rising financial markets rather than wage growth. Disparities between incomes and wealth must be narrowed if the U.S. economy is to produce maximum social benefit: Over 60% of change in U.S. GDP is driven by consumption Remedial strategies and policies: Redistribution of income Redistribution of wealth Stimulate economic growth and/or remove obstacles All of the above Most agree that economic growth is beneficial regardless of strategy or policy. Structural challenges will make growth difficult to achieve. 22

23 Falling U.S. Budget Deficit What happens after 2024? 23

24 Explosion In Debt 24

25 Unsustainable Federal Spending Focus: Medicare & Medicaid, Social Security, Military, Interest on Debt. 25

26 Unsustainable Federal Spending What happens when interest rates normalize? 26

27 Long-Term Summary The net benefit from the energy revolution is resoundingly positive and will likely lift economic growth. Income and wealth disparity must narrow if the economy is to provide optimal benefits to society. Economic growth is the most effective remedy to disparities Structural impediments to growth are very large: Demographics are not helpful Government debt service could crowd out private investment Regulatory burden continues to grow at alarming rates A near-term change in trajectory can send a positive self-reinforcing signal. Expected returns from financial assets are being reset to well below historic averages. 27

28 Disclosure CUNA Mutual Group is the marketing name for CUNA Mutual Holding Company, a mutual insurance holding company, its subsidiaries and affiliates. Annuity insurance products are issued by CMFG Life Insurance Company and Members Life Insurance Company, both located in Madison, Wisconsin. Each insurer is solely responsible for the financial obligations under the policies and contracts it issues. CUNA Mutual Fiduciary Consultants is a marketing name and service of MEMBERS Capital Advisors, Inc., 5910 Mineral Point Road, Madison, WI 53701, the registered investment advisor affiliate of CUNA Mutual Group. MEMBERS Capital Advisors has assets under management of more than $15.2 billion*, including the general account of CMFG Life Insurance Company. Visit for more information. *As of April 30,

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